Aarons 2008 Annual Report Download - page 31

As of December 31, 2008 and 2007, the net intangibles other
than goodwill were $7.5 million and $4.8 million, respectively.
The customer relationship intangible is amortized on a straight-
line basis over a two-year useful life while acquired franchise
development rights are amortized over the unexpired life of the
fran chisee’s ten year area development agreement. Amortization
expense on intangibles, included in operating expenses in the
accompanying consolidated statements of earnings, was $3.0
million, $2.5 million, and $2.4 million during the years ended
December 31, 2008, 2007, and 2006, respectively.
IMPAIRMENT — The Company assesses its long-lived assets other
than goodwill for impairment whenever facts and circumstances
indicate that the carrying amount may not be fully recoverable.
As part of this assessment we review performance at the store
level to identify any mature stores with two consecutive years of
cash flow losses that should be considered for impairment. We
compare the undiscounted expected future cash flows with the
carrying amounts of the assets. If the sum of the undiscounted
cash flows is less than the carrying amounts of the assets we
further evaluate for impairment. The amount by which the car-
rying value exceeds the fair value of the asset is recognized as
an impairment loss. The fair value is estimated using discounted
expected future cash flows or market prices for similar assets. As
we assess the ongoing expected fair value and carrying amounts
of long-lived assets, changes in store performance and cash flows
could cause the Company to realize material impairment charges
in future periods. The Company recorded an impairment charge
of $838,000 in 2008 which relates primarily to the impairment of
leasehold improvements in several of our RIMCO stores included
in our sales and lease ownership segment.
DEFERRED INCOME TAXES — Deferred income taxes represent
primarily temporary differences between the amounts of assets
and liabilities for financial and tax reporting purposes. Such
temporary differences arise principally from the use of accelerated
depreciation methods on rental merchandise for tax purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS — At December 31, 2008
and 2007, the fair market value of fixed rate long-term debt
approximated its carrying value.
REVENUE RECOGNITION — Rental revenues are recognized as
revenue in the month they are due. Rental payments received
prior to the month due are recorded as deferred rental revenue.
Until all payments are received under sales and lease ownership
agreements, the Company maintains ownership of the rental mer-
chandise. Revenues from the sale of merchandise to franchisees
are recognized at the time of receipt of the merchandise by the
franchisee, and revenues from such sales to other customers are
recognized at the time of shipment, at which time title and risk
of ownership are transferred to the customer. Refer to Note I for
discussion of recognition of other franchise-related revenues. The
Company presents sales net of sales taxes.
COST OF SALES — Included in cost of sales is the net book value
of merchandise sold, primarily using specific identification. It is
not practicable to allocate operating expenses between selling
and rental operations.
SHIPPING AND HANDLING COSTS — The Company classifies
shipping and handling costs as operating expenses in the
accompanying consolidated statements of earnings and these
costs totaled $55.1 million in 2008, $48.1 million in 2007, and
$40.5 million in 2006.
ADVERTISING — The Company expenses advertising costs as
incurred. Advertising costs are recorded as expenses the first
time an advertisement appears. Such costs aggregated to $28.5
million in 2008, $29.4 million in 2007, and $25.3 million in
2006. These advertising expenses are shown net of cooperative
advertising considerations received from vendors, substantially all
of which represents reimbursement of specific, identifiable, and
incremental costs incurred in selling those vendors’ products. The
amounts of cooperative advertising consideration netted against
advertising expense were $24.7 million in 2008, $20.1 million in
2007, and $18.3 million in 2006. The prepaid advertising asset
was $1.5 million and $2.4 million at December 31, 2008 and
2007, respectively.
STOCK-BASED COMPENSATION — The Company has stock-based
employee compensation plans, which are more fully described
in Note H below. The Company estimates the fair value for the
options granted on the grant date using a Black-Scholes option-
pricing model and accounts for stock-based compensation under
the fair value recognition provisions of FASB SFAS No. 123(R),
Share-Based Payments (“SFAS 123R”).
INSURANCE RESERVES — Estimated insurance reserves are accrued
primarily for group health and workers compensation benefits
provided to the Company’s employees. Estimates for these
insurance reserves are made based on actual reported but
unpaid claims and actuarial analyses of the projected claims
run off for both reported and incurred but not reported claims.
COMPREHENSIVE INCOME — For the years ended December 31,
2008, 2007 and 2006, comprehensive income totaled $88.8
million, $80.2 million, and $78.6 million, respectively.
FOREIGN CURRENCY TRANSLATION — Assets and liabilities
denominated in a foreign currency are translated into U.S.
dollars at the current rate of exchange on the last day of the
reporting period. Revenues and expenses are generally translated
at a daily exchange rate and equity transactions are translated
using the actual rate on the day of the transaction.
NEW ACCOUNTING PRONOUNCEMENTS — In December 2007,
the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141R”). Under SFAS 141R, an acquiring
entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition date
fair value with limited exceptions. SFAS 141R will change the
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